By Tara Seals

Posted: 1/2004

It’s a New Year for DSL Resale
Application Bundles Promise Fresh Direction for 2004
By Tara Seals

New Years resolution No. 1: I resolve to
add
enhanced applications to my DSL broadband service offering. Resolution No. 2: I
resolve to tap a viable market for my bundle. Resolution No. 3: I resolve to
differentiate myself competitively from other resellers.

While promises about delivering content and applications over
DSL hardly are new, their actualization has been hampered by an unproven
business case. 2004, however, finally may be the year over-DSL offers go
mainstream. With end-to-end quality of service (QoS) a reality and applications
such as VoIP and multimedia gaming finding real audiences, some DSL resellers
are heading into the New Year with bundles of applications, content and access
technology.

Central to this new beginning are the DSL Forums new
technical reports, TR-058 and TR-059. Working with carriers, service providers
and equipment manufacturers, the Forum has outlined an end-to-end IP
architecture with QoS capabilities for DSL. The blueprint is a departure from
using an ATM permanent virtual circuit architecture, which offers one class of
service: an IP best-efforts level.

We hope to take this to a whole different level of service
with a new architecture, which will now enable the continued support of the
best-efforts service, but also the ability to differentiate flows with several
levels of priority, explains Tom Starr, president and chair of the DSL Forum
board of directors and a senior member of SBC Communications Inc.s technical
staff. Were expecting this will initially be based on the DIFFSERV QoS
model, but I think we will work over time to also look at other, more advanced
techniques.

Real-time media applications such as voice and video require
adequate resources along the transport path and, therefore, require specific QoS
support. Under the new technical report specifications, a variety of QoS flows
can be supported for multiple real-time applications over a single DSL
connection.

Until now, fast data transfer for Web surfing, e-mail and
file exchange have been the key reasons why millions of subscribers have chosen
to upgrade to broadband DSL from a narrowband Internet connection, says
Michael Brusca, vice president of strategy for the DSL Forum.

However, 2004 will see DSL evolve from mere access to a
value-added sale. What that means is, the platform were [creating} would
potentially support a different broadband experience for Internet surfing,
gaming, multimedia downloads, VPN, VoIP or other services that would require
either more bandwidth or had a more deterministic delivery characteristic for
the traffic, says Rich Wonders, senior director of broadband marketing at
BellSouth Corp., which is migrating its network to the new architecture.

BellSouth resellers are using the ILECs DSL platform and
bundling in content. We are seeing many folks starting to shift their models
toward a content-oriented model, maybe more so than they have in the past,
says Wonders. He adds, the ability for an ASP or reseller to offer an end user a
differentiated level of service (e.g. one that allows them to play an online
game while another user surfs the Internet) has a huge upside for application
service providers and will cause them to accelerate the development and the
delivery of broadband applications.

POP THE CORK

For DSL resellers and ISPs, the end game is creating a bigger
value proposition with any individual customer. For resellers fighting thinning
margins, the ability to add value to a broadband connection sale is crucial,
since applications raise the average revenue per customer.

Internet access has been reduced to a commodity, and the
pressure on eroding margins has been pretty strong in the last 24 months, says Cameron Christian, vice president of sales and marketing
at DSL reseller Velocitus. We cant build a continuing business around a
commodity, so we have no choice but to add applications and additional value for
the customer. And certainly drive average revenue per subscriber and average
margins back up again.

DSL added another 10.7 million subscribers in the first half
of 2003, reports London analyst firm Point Topic. This brings the total number
of subscribers to 46.7 million. North America added 1.2 million new subscribers
in the six-month period.

Research firm Atlantic-ACM says DSL uptake has a compound
annual growth rate of 25.9 percent, as opposed to a cable modem CAGR of 19.5
percent. However, tackling the mass market has been tough for service providers.
The ISP market is experiencing Darwinism in hypermode, according to Atlantic-ACM analyst Joyce Lo, as subscribers
migrate from premium dial-up services such as MSN and America Online Inc.
to cheapo dial-up service or broadband. Accordingly, AOL and MSN began reselling
DSL, launching branded broadband offerings.

While these strategies may have been sound on paper, theyve
had little real-world success migrating dial-up customers to these services, says Lo. MSN recently ended a two-year-old broadband access
deal with BellSouth, effectively dropping out of the broadband
access business due, in part, to poor returns.

While content and enhanced applications are the salvation, its
still an uphill battle for mainstream ISPs, since Internet content [is]
considered by many to be a commodity itself, cautions Lo.

Success in the applications world hinges on identifying the
right target market, according to Mike Apgar, chairman and founder of Speakeasy
Inc., a DSL reseller. We focus on segments of customers that are doing more
with their connection and are frankly more demanding around a given application
or entertainment vehicle than the mass-market customer, he says. We know
theyre willing to pay a little bit extra for that. A small business market
thats using a VPN or VoIP solution requires a guaranteed level of latency and
SLAs. Its critical to our model that we are able to find ways to add value to
broadband connectivity, specifically DSL and T1.

NOISEMAKERS

Though the technology now supports advanced, targeted
applications, the question remains whether there is enough demand to justify
rolling them out. Movie downloads, interactive streaming media, telco TV and
other applications are exciting, but the market isnt there yet. However,
applications such as VoIP and VPNs for small business and gaming for the
consumer market hold viable promise and will form the majority of over- DSL
rollouts in 2004.

Until this year, most of our partners really didnt have
a content play, says Hunter Middleton, director of product development at
Covad Communications Group Inc. But one area weve definitely seen some
changes in this is around the voice options and trying to get a quality VoIP
service delivered. We are getting much more traction with partners right now, to
look at prioritizing voice traffic and to deliver a high-quality VoIP service.

Covad VoIP is not deployed yet, but Middleton says product
development now is being fueled by QoS and resellers that want to move away
from a Vonage model (featuring unlimited local and long-distance calling over a
customers existing broadband connection) and go to a more targeted
interaction, where they combine the content and the network.

Speakeasy, which resells eight underlying last-mile carriers
DSL and T1 connections, offers its own Web hosting and VPNs for businesses,
bundled with the DSL or offered as an a la carte add-on. Spurred by the new
QoS-enabled DSL architecture, Speakeasy plans to launch two VoIP products in
2004: One for residential/SOHO users, and one for small to medium-sized
businesses, up to 100 or 200 seats.

Speakeasy has interconnected into its last-mile carriers
networks, and so we can provide end-to-end QoS from an SBC connection in L.A.,
over to our backbone and out to a Verizon last-mile connection in New York, 
says Apgar. Thats very powerful when you start to offer
VoIP, because youre effectively not even transiting the Internet, its over
our private MPLS backbone. That will really start to differentiate our business
solution.

Verizon Communications Inc. also announced plans to unveil
VoIP service this year, potentially available via resellers. In the second
quarter, Verizon will offer a basic bestefforts VoIP service for consumer DSL
customers. In the fourth quarter, the RBOC will launch a managed VoIP
service over DSL and T1s for businesses and consumers willing to pay more for
QoS.

Velocitus is deploying a softswitch to be able to layer voice
on top of DSL, for a VoIP offer aimed at small business. It has applied for its
CLEC license in some Western states. We think the new softswitch and delivery mechanism will
give us a dramatic competitive advantage over traditional telephone companies
and clearly against the incumbent, says Velocitus Christian. We can, for about a tenth of
the capital cost, produce a functionally equivalent offer. And things like
integrating the voice messaging systems with the e-mail systems are a real
natural for this product because everythings data already.

The flurry of VoIP rollouts could be just the thing to start
the rollouts of other DSL/application bundles. The first step is to get the
product out there that shows the value of managing the QoS, says Middleton.
I think voice is going to be the first area that really proves that out, and
people will see that you can provide additional value by linking the content and
the network capabilities together, and it will more rapidly evolve into other
areas.

Another business application with promise is broadband-enabled
credit-card transaction processing for small businesses. As with VoIP, the
broadband piece becomes a platform that allows businesses to do other things: it
is the means, not the end. The overwhelming majority of the small businesses
that do that [process credit cards] do it via a dial-up connection, says
Wonders. But with DSL, they can go from 30 seconds per transaction to less
than eight seconds. So if youre a small business merchant and you have people
lined up out the door of your dry cleaner, being able to get them in and out
faster has value.

For the consumer market, gaming is in demand. Speakeasy hosts
game servers at its data centers and provides a file download service that has
several hundred thousand files related to gaming, including the latest maps,
logs and graphic drivers. Weve done well there, and as we roll out this
network next year that takes and interconnects all of our data centers, it will
be a gaming ring, so gamers in L.A. can play other Speakeasy gamers in
Washington or Chicago, says Apgar. So were working with software
developers and what we call clans in gaming to provide for highly
differentiated, almost tournament- quality service. Demand is terrific.

One problem in teaming up with household-name gaming
providers, such as Microsoft Corp.s X-Box division and Sony PlayStation, is
they dont want to restrict themselves to any one network and so take a
network-agnostic approach, says Middleton. Thats really hard to marry that
with the network because its scattered and fragmented. X-Box owns its own
gaming platforms and centers, he explains. So the industry structure for
how these things get delivered can have a big impact on whether youre able to
take advantage of the QoS opportunities or not. Nonetheless, Velocitus is
looking into the requirements for being X-Box-certified for the WAN segment.

Although thats a really small niche, we think its
growing, and those customers are willing to pay for performance, so theyre
not quite as costconscious as other consumers might be, says Christian. In
order for their experience to be worthwhile online, they have to have a pretty
high-performance backend.

Image: Home Networking

REASON TO CELEBRATE

This years DSL resale opportunity doesnt end with
QoS support. Ultimately the customer will, on the fly, be able to change
the bit rate of the line to match the applications that are running, as well as
the QoS packet priority. The user would pay a premium for the time the bit rate
is heightened. If theyre doing interactive gaming, having very low latency
is important, says SBCs Starr. If they want to download video with high
quality, then the bit rate can be heightened to support that for the duration of
that movie.

The DSL Forums new architecture is designed to facilitate
many service providers connecting into the access network, so a customer also
could change from one service provider to another on the fly, depending on the
application, rather than being permanently assigned to one service provider.

This innovation could translate into revenue opportunities in
the long run, since service providers could have access to accounting
information allowing different types of billing arrangements: usage-based,
flat-rate, or pay by the hour, day, session or content (e.g., a movie). It puts in place the tools that allow us to move beyond the
fixed-rate bill-per-month model to one where there could be a base fee, and then
you pay by the drink for some of the enhanced offerings, explains Starr. It
couples the network engineering with the business model, to greatly increase the
revenue that could be earned by service providers. But furthermore it puts in
place what I would call a sustainable business model for spending the resources,
because the customers who are demanding the additional resources from the
service provider and the access provider are automatically paying for those.

If the business case is proven out this year with VoIP and
gaming, other applications that use these technological innovations should
follow. Its a bit of a chicken-and-egg scenario, says Wonders. As
more applications are built, the more demand will surface. As more demand
surfaces, more applications are built. But all of that presupposes there is an
infrastructure and an architecture that is ready to deliver those services.